Fed chair contender is now in favor of cutting rates, just as Trump wants

Kevin Warsh, a top contender to replace Jerome Powell as chair of the Federal Reserve, is finally ready to cut interest rates. 

As a governor at the US central bank from 2006 to 2011, Warsh called for higher rates even in the depths of the financial crisis, warning often of impending inflation. That’s a concern he’s reiterated as recently as last year. But this year, Warsh has become an enthusiastic supporter of lower borrowing costs.

His transformation comes at a time when President Donald Trump’s demands that the Fed cut rates are reaching a fever pitch, and Trump has made clear he won’t pick a candidate who isn’t ready to deliver.

“The Fed has the policy mix exactly wrong — it has a big balance sheet, like we’re in the ‘08 crisis or the 2020 pandemic, and has rates that are too high,” Warsh said Sunday in a TV appearance on Fox News. “It needs to shrink the Fed balance sheet and cut interest rates. In so doing, Main Street can get a much lower cost of credit.”

Beyond cutting rates, Warsh has plans for a sweeping overhaul of the institution. In reimagining everything from how the Fed thinks about inflation to its staffing levels, he wants to recast an organization he believes has lost its way.

That reboot plan can only further ingratiate him with a president eager to put his stamp on the one agency that has so far escaped his goal of reshaping the federal government.

Warsh declined to comment on the record for this story.

Staunch hawk

Warsh has long lamented the central bank’s multiple bond-buying programs, especially those conducted outside financial crises. He resigned from the Fed in 2011 soon after then-Chair Ben Bernanke embarked on a second round of purchases aimed at stimulating the overall economy. Interest rates were still at zero and couldn’t go lower, so the Fed turned to buying longer-term bonds to suppress borrowing costs.

Now Warsh says reducing the balance sheet — which would put upward pressure on actual borrowing costs — would allow the Fed to move the other way with the short-term policy rate. 

But support for a lower federal funds rate, at a time when inflation hasn’t yet fully returned to the Fed’s 2% goal following four years above it, still marks a shift for the once-staunch hawk.

Warsh was appointed to the Fed’s Board of Governors by President George W. Bush. He promptly warned about inflation pressures at his first meeting and did so frequently during his five-year tenure at the board. In May 2008, just two months after the collapse of Bear Stearns and following 3 percentage points of cuts over the prior eight months, Warsh argued that further reductions could ignite inflation.

Four months later, the global financial system nearly collapsed when the housing bubble finally burst. At that point, Warsh voted with his colleagues to cut rates to zero in late 2008, but by September 2009, with inflation in negative territory and unemployment nearing 10%, he said the Fed might have to raise rates with “greater force” in the future than it had in the past to combat inflation pressures. The Fed didn’t raise rates until 2015 and core inflation during that six-year period averaged 1.5%.

Open campaign

That past hawkish track record could hurt Warsh’s chances of being Trump’s pick. Other candidates include Treasury Secretary Scott Bessent, National Economic Council Director Kevin Hassett and Fed Governor Christopher Waller, all of whom have expressed a readiness to cut rates.

In an interview with Bloomberg Television on Tuesday, Bessent said a formal process had begun to select the next chair, and that he was part of the decision-making process. “There are a lot of good candidates inside and outside the Federal Reserve,” he said.

But Warsh’s recent speeches and newspaper editorials, his near clinching of it when Trump last nominated a chair in 2017 and Trump’s remarks since then that he should have picked Warsh over Powell all work in his favor.

“Kevin, I could have used you a little bit here. Why weren’t you more forceful when you wanted that job?” Trump said in early 2020.

The president is now hoping to avoid the same outcome — stuck with a Fed chair who refuses to bend to his will and lower rates. He told reporters on June 27 that “if I think somebody’s going to keep the rates where they are or whatever, I’m not going to put them in.”

That’s raised concern among central bank watchers over the Fed’s independence. But the Fed chair casts just one of 12 votes at Federal Open Market Committee meetings, and may have a hard time persuading a majority of his colleagues to vote with him if they think it’s just for political reasons.

“He was the one for years complaining about inflation when it didn’t exist, and has kind of changed his tune,” said Stephen Myrow, who runs Beacon Policy Advisers and crossed paths with Warsh while working in the Bush administration.

“People will like that he has the resume and can play the part, but he clearly doesn’t have any core convictions,” Myrow said.

Battle tested

Warsh was just 35 and serving as executive secretary of the National Economic Council in 2006 when Bush made him the youngest governor in the central bank’s history. At the time, many saw his ascent as partly won through family connections. Warsh is married to Jane Lauder, the daughter of prominent and active Republican donor Ronald Lauder — the son of makeup scion Estee Lauder. 

His age, boyish good looks and wife’s immense wealth — now estimated at around $2.6 billion — immediately distinguished him from the staid academics at the Fed. Warsh, who has a law degree from Harvard and worked at Morgan Stanley before joining the Bush administration, wasn’t well known and was seen as a bit of a lightweight when he first came to the Fed. 

That quickly changed when the financial crisis hit. Warsh’s connections on Wall Street proved pivotal when failing banks left regulators scrambling to find buyers, turning the young governor into Bernanke’s right-hand man.

Warsh helped broker the sale of Wachovia Corp. to Wells Fargo & Co., and was the architect of a plan to supply the country’s nine biggest banks with billions of dollars of capital in the fall of 2008.

“It was a tumultuous time and so Kevin’s been battle tested,” said Randall Kroszner, who served as Fed governor at the same time as Warsh and is now a professor of economics at the University of Chicago’s Booth School of Business.

Fed overhaul

Since leaving the job, Warsh has been a frequent critic of the central bank from his post as a visiting fellow in economics at Stanford University’s Hoover Institution. 

He’s called for the central bank to use new models for forecasting the economy, questioned why it doesn’t take the role of money supply into account when thinking about inflation and has criticized policymakers’ communications as too frequent and too focused on the short term.

He’s questioned everything from how the Fed communicates to its forecasting of the economy and interest rates.

When it comes to inflation and central bank independence, Warsh says the Fed’s woes are of its own making. Inflation remains above target because the Fed acted too late to combat its run-up following the pandemic, he says, and its reluctance to self-reflect on that policy misstep has damaged its standing with the public and investors.

Regime change

“I think what we need is regime change at the Fed, and that’s not just about the chairman, it’s about a range of people,” Warsh said on Fox News. “It’s about breaking some heads, because the way they’ve been doing business is not working.”

High prices are also driven, he said, by increased government spending, which he blames partly on the Fed. He argues the central bank’s ballooning balance sheet has permitted lawmakers to keep adding to the national debt by keeping interest rates artificially low.

Powell, by contrast, has blamed the post-Covid surge in prices mainly on supply-chain disruptions, which the Fed cannot address, though he’s acknowledged the Fed moved too late when inflation became more ingrained.

On current policy, Powell has made clear the Fed probably would have cut rates more this year if not for inflation worries driven by Trump’s tariffs.

Warsh doesn’t buy it. 

“The Fed’s current wounds are largely self-inflicted, and its plot armor is showing its wear,” Warsh said in an April speech at an event on the sidelines of the International Monetary Fund spring meetings. “A strategic reset is necessary to mitigate losses of credibility, changes in standing and most important – worse economic outcomes for our fellow citizens.”

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